How to Form an LLC; Everything You Need to Know

If you've ever wondered how to form an LLC, you're in the right place. It's one of the most popular business forms in the United States because it's versatile, allows you to gain the protections of a corporation, but is much cheaper to maintain.

Forming an LLC is only the beginning.

There are many other things to take into consideration like your registered agent, bank accounts, and more.

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In this guide, we'll dive deep into the nuances of how to form an LLC in the United States.

Before that, here are multiple guides we've written on the different services and considerations when you're starting and growing your LLC.

What is an LLC?

A limited liability company (LLC) is a type of legal entity formed to operate and efficiently own a business. 

In broader terms, an LLC is a business structure that ensures business owners are not on the hook for the company's debts or liabilities. This is, of course, within reason. You can’t form an LLC to commit fraud and think you’ll be safe from the consequences.  

LLCs are prominent for their relatively easy and inexpensive formation and reporting requirements. It’s become even more popular because it offers the same limited liability as a corporation.

Let’s look at the benefits and the disadvantages of an LLC.

The benefits of an LLC

Simplicity

It's relatively easy to form and maintain an LLC; this is one of the main reasons it's famous. LLC’s legal entity doesn't require much paperwork. Additionally, it has minimal requirements relating to company records, formal officers, and annual meetings. 

On the other hand, a corporation is required to have shareholders, regular board meetings, officers and directors, etc. So, when compared to standard C corporations, people gravitate towards LLCs for simplicity.

Flexibility

As regards ownership, management, and taxation, LLCs offer vast flexibility. There's no limit to the number of owners it can have. It can have a single member or hundreds of members.

An LLC has the flexibility to assign a manager to see to the business' operations. The managers could be an appointed member or not, or a combination of both. Conversely, all the members of an LLC could be responsible for the day-to-day running of the business.

LLCs also have the flexibility to choose the taxation model. They can be taxed as sole proprietorships, partnerships, or even corporations. 

LLC owners can qualify for special tax through deduction, formed by the Tax Cuts and Jobs Act. The special tax through deduction took effect in 2018 and has been scheduled to land through 2025.

Protection of personal assets

One of LLC's essential benefits is that it offers its owners personal liability protection. Forming an LLC guarantees that creditors can't gain access to LLC owners' assets such as homes, cars, or bank accounts to clear business debts.

Credibility

Forming an LLC to operate your business gives your company the legal standing to use its name on official documents and agreements. It also gives your customers a guarantee that your company is real and they’ll have recourse in case something goes wrong. 

Disadvantages of an LLC

It’s not all good. There are disadvantages to owning an LLC.

Ownership transfer

With a corporation, it's relatively easy to transfer ownership. However, transferring ownership in an LLC can be difficult. 

Corporations allow stock shares to be sold to increase ownership; unless otherwise restricted, a shareholder can sell a percentage to someone else.

Unless agreed upon beforehand, all the LLC members must give their approval to the inclusion of new members or change the percentage of ownership of the members.

Costs

The cost to form and maintain an LLC is on the upper side when compared to a sole proprietorship or partnership. The state charges an initial formation fee, and there are other ongoing costs like franchise tax fees and annual report fees. 

With that being said, it’s still cheaper to maintain an LLC than it is to maintain a corporation. 

Investment disadvantages

LLCs are not ideal for business owners seeking institutional investment due to their continuity limitations. Corporations are the best option for outside investments because, in exchange for an investor's cash, stock can be issued.

How to form an LLC

An LLC is relatively easy to form, but some administrative and compliance tasks are also required. Below is a breakdown of the steps needed to create an LLC.

Choose the resident state

Most LLC owners form an LLC in their state of residence, which often turns out to be where they plan to set up a business. Creating an LLC in a different state will warrant the LLC registration as a foreign LLC called 'foreign qualify' to do business in the state where the company is run. 

Also, forming an LLC in a different state can increase the expenses of the formation and administration. LLC laws, taxation, and costs are different in each state, making some states more beneficial for small businesses than others.

Choose a name

It's essential to select a name that is not on the records of the secretary of the state when forming an LLC. The majority of sole proprietors run their businesses under a registered DBA - 'Doing Business As' name, and they intend to use the name as their LLC's legal name.

Conduct an LLC name check on your formation state's website to make sure your desired name hasn't been taken. It’s different for every state but Inc Authority can help you do a proper name check.

If you're not ready to file your LLC formation document, you can still reserve the name of your LLC. Keep in mind that there are separate fees for a name reservation.

It’s a good idea to do a trademark search of the name you want to use. This will help you avoid issues that can crop up when using trademarked terms in a way that infringes on a copyright.

Select a registered agent

A registered agent is required when forming an LLC whether you’re in your resident state or a foreign state. 

A registered agent collects required legal notices and tax documents for an LLC. Those documents include notices from the state government, tax information, annual reports, etc. It gets sent to your registered agent at the registered address.

All businesses, even small businesses, need a registered agent to avoid the mishandling of crucial documents. If certain documentation is lost, it can cause problems for the LLC so most businesses hire professionals like Northwest Registered Agent to handle this process but you can be your own registered agent.  

The registered agent you choose must have an address in the state.

Create the operating agreement

An operating agreement is an agreement between LLC members regarding how the LLC will be operated. It’s required even if you’re forming a single-member LLC. 

In broad strokes, the LLC operating agreement determines how the LLC handles certain situations like disputes, who has what rights, etc. This can be extremely helpful when a dispute arises amongst members of an LLC.

The documents must be detailed and explicitly touch on labor and profits, division of ownership, transfer membership interests, how the profits and losses will be shared, and so on.

While there are templates online that’ll help you draft a basic LLC operating agreement, it’s a good idea to hire an attorney. It may be more expensive up front but it can save you a lot of money down the line. 

File your paperwork with the state

After doing all of the preliminary work, your LLC isn’t yet a legally recognized entity. That only happens once you file your LLC formation documents (Known as the Certificate of Formation, Articles of organization, or Certificate of Organization) with the secretary of state’s office of the business management department in that state. 

While people refer to LLCs as being incorporated, they’re not. The proper term is that they’re organized or formed. It may not make any difference in a practical sense, but it’s an interesting tidbit nonetheless.

Get your EIN (Employer Identification Number)

The IRS gives an EIN (Employer's identification number) to business entities like LLC and it serves as a way for the IRS to keep track of the business. Think of it as equivalent to a SSN but it’s for businesses instead of people.

The fact that it's called an Employer identification number doesn't mean you have employees. It's a type of taxpayer identification number (TIN) given for free by the IRS that identifies your LLC.

Keep in mind that you can’t apply for an EIN at the same time you submit your Certificate of Formation for approval. 

Services to make registering your LLC easy

Highlighted below are some services that'll make your LLC registration much easier. They’ll help you prepare the right documents, find registered agents, expedite the process, and even file for an EIN.

Northwest registered agent

The process of LLC formation with Northwest Registered Agent is much easier than doing it yourself. The application process is streamlined and easy to follow - all you need to do is fill out your business details and pay for the order.

Northwest boasts of only one package, unlike its competitors that provide many packages of bundled features. 

Its streamlined services enable it to pay more attention to the minute details that can help you save time and money. Just by looking at the reviews, you can see that they’ve delivered for customers time and again. If the fees are too high at Northwest Registered Agent, take a look at ZenBusiness. 

ZenBusiness

ZenBusiness is one of the top-rated business formation services in the industry. The ZenBusiness formation process is relatively simple and only takes a few minutes from start to finish.

ZenBusiness offers its clients three separate packages for incorporating online. 

Some of the notable features are obtaining an Employer's identification number (EIN) from the IRS for your company, a banking resolution template, its 'worry-free guarantee, which means that it will handle your compliance management service and annual report, etc.

Once you choose a package, enter the required information and then follow the instructions. It’s almost impossible to get it wrong. 

Incfile

Incfile makes the creation of an LLC or other business entity simple and fast. The website helps customers save money - it offers enormous value with its most basic packages.

With only the state fee, Incfile helps you process your order within the next business day and also provides a free registered agent service for a year.

The middle and top-tier business formation packages of the company also provide unique. These include services such as banking resolution, operating agreement, expedited state filing, building a website for your business, etc.

LLCs vs. other types of companies

When starting a company, several business entities are often chosen; the notable ones are LLCs, S corp, and corporations. However, these business entities differ in several ways.

LLC vs. S Corp

Unlike an LLC, a business entity, an S Corp is not a business entity, neither is it a sole proprietorship, corporation, or partnership. Instead, it's an elected method of ascertaining the way your business is taxed.

LLC members pay self-employment taxes to the IRS, and these tax rates change annually. With an S Corp, shareholders get paid salaries, and the business pays the payroll taxes - this is deducted as a business cost from the company's taxable income.

The management structure of LLCs and S Corps are different. In an LLC, the members could manage an LLC, or managers could run it. An S Corp usually has a board of directors and officers that oversee significant decisions and corporate formalities.

While an LLC can have an unlimited number of members, an S Corp can't have more than 100 shareholders in total.An LLC permits non-US citizens as members while an S Corp doesn't.

LLC vs. corporation

Perhaps the most apparent difference between the two types of organizations is that while shareholders own a corporation, an LLC is owned by an individual or multiple individuals.

Also, a massive difference between an LLC and a corporation is the way they are taxed.

The LLC tax charges depend on the owner's income like it does when one files as a sole proprietor. LLC owners may also be required to pay taxes on self-employment. Failure to pay up on time may attract penalties and can cause involuntary business dissolution.

On the other hand, corporations are taxed as a different legal entity that can earn income independently. 

Corporations are given the task of paying tax on their profits and a tax on the dividends distributed by the entity to its shareholders because dividends cannot be tax-deductible; therefore, dividends are taxed twice.

Another difference between an LLC and a corporation is in its business ownership structure. The shareholders can own a considerable portion of the company by transferring shares, buying more stocks, or s/he can decide to own fewer stocks by selling off stocks.

In an LLC, it’s more difficult to change the ownership structure. 

Conclusion

The article gives a detailed insight into how to form an LLC, the benefits and disadvantages of creating an LLC, and other topics around it.

Are you trying to start a company? Take a critical look at the article to get a guideline on how to go about it properly the first time around.